Uni-President China:Leading by example

Leading the way in premium market. It is becoming clear that there’s nolonger a volume but rather a value growth story in China. Indeed, both theinstant noodle and beverage markets saw higher value over volume growth in2015. All of UPC’s recent product launches fall in the premium category andthe product premiumization has paid off handsomely as NPM expanded2.5ppt YoY to 3.8% last year. Moreover, UPC is the market leader in thepremium noodle market (Rmb5 or above) with 40% share and they areconfident they can keep gaining momentum in this market. Overall, mgmtstands firm by its product premiumization strategy and believes now is a goodtime for product upgrade on the back of change in consumer preference andrising disposal income. From a global perspective, mgmt believes long termNPM at 10-12% is reasonable and differentiated products should deliver 20%NPM. We estimate the company’s net profit to see robust growth at +31.2%and +19.5% YoY in FY16 and FY17 respectively.

Focus on brand equity to avoid short product life cycle issues. In thepast, UPC focused on developing successful products such as “Lao TanPickled Cabbage and Beef Flavored Noodles” and “Crystal Sugar Pear Drink”.

However, these products have short product cycles and suffered sharp salesdeclines after 1-2 years. Mgmt now focuses on building brand equity toelongate product life cycle and rolls out new flavours under successful brands.

For instance, UPC added two new flavours to “Haizhiyan” and one newflavour to “Classmate Xiaoming”. Mgmt also noted a channel stuffing issue forHaizhiyan in 2H15 has been resolved and sees healthy sales momentumYTD. We agree with UPC’s strategy to focus on brand rather than specificproducts as brand equity holds the key to longevity of product life cycles.

Distributor reform amid labour supply tightness in China; JML disposalplan still on agenda. In lieu of slowing population growth and an agingsociety, labour supply tightness is a growing issue in China. Hence, mgmtbelieves it is no longer viable to rely on a massive sales force to drive salesgrowth. Instead, UPC plans to utilise its solid brand image to attractcustomers. UPC prefers to work with distributors who value quality productsand is less keen to participate in price competition. As for other investments,they are still looking for potential buyers for Jingmailang, a beverageinvestment, as the two companies’ business developments has diverged.